Playing your cards right

If you want investors to take a chance on your business, you should be able to offer a deal that will favour both parties

One of the many reasons that investment pitches get rejected right away has to do with the lack of monetary appeal to it. It’s been said that only 10 per cent of businesses take off, which makes investing in one a very risky move. So if you want investors to take a chance on your business, you should be able to offer a deal that will favour both parties. Why should the investor buy into your company instead of playing it safe and buying real estate that promises him/her a strong 20 per cent return? Or wouldn’t it be better for the investor to put his/her money in a fixed deposit and expect a clean, highly liquidable 8-10 per cent return every year? These are questions you should ask before cutting a deal with an investor. A bargain of Rs five lakhs for a 20 per cent stake in your company instead of 15 per cent will mean nothing to the investor if the company doesn’t show a promising growth potential and a return that is higher than offered by the likes of real estate and fixed deposits. An investment begins with a deep mutual understanding, so if the deal isn’t good for both sides, it’s not a good deal. Cut a good deal that will bring in valuable resources to the company, but don’t try to undervalue—or overvalue—your company in the process.

Know your market and the investors

Investors are investors for a reason; they have a great deal of financial resources at their disposal. But they didn’t achieve this level of affluence by being generous; they did it by being smart. So before going into the room and pitching your idea, understand that your investors know more than you do. This is a panel that has been exposed to more startup ideas than you’d imagine. They know what works, and what doesn’t. Moreover, they might even have insights into the market you might have not known previously. When Resham Corporation decided to invest in Danfe Solution’s Restro Order, a food-ordering system for restaurants, the investors were aware that the government was coming up with a rule that would soon make an electronic food-and-beverage management system a necessity in restaurants. The investors knew that the company was going to have scaling potential right away once the rule was implemented.

Since the investors are so well-informed in areas they invest in, they have the upper hand when it comes to a lot of deals. The only way you can turn the tables and gain the upper hand is by doing prior research. Superficial knowledge won’t do. You are trying to persuade someone to buy into your company. Do your investor-research, find out as much as you can about them. Find out about the kind of companies they have invested in previously, and whether those companies have been successful. Be well-informed about your own market and product so that you can answer every question the investor poses, without hesitation.

Presentation

Other than the product or service itself, a big part of any investor’s decision is going to be based on the presentation of your pitch. Before investing in the product or service, the investors are investing in you. In a way, they have invested time in listening to your pitch, and if the appeal of your product aligns with what the investor is looking for, there is a lot more the investor will be investing other than the five minutes of their time. No matter how revolutionary your product is, it will need an introduction. There is no universal template for pitching where you can enter your information and render the perfect pitch. It’s a demanding task, but in the five minutes you have been granted, you need to be able to capture the essence of your project, the return on investment, and the strategies on scaling. That said, these are just facts and figures. While facts and figures are important, making the entire pitch about the numbers alone won’t help you make your point persuasively. A good pitch strikes the balance between the numbers and the human connection.

A comprehensive business plan, the same business plan in the form of a condensed powerpoint, and a two-page brief of the powerpoint: these are the materials a person usually takes with them when meeting an investor. But try to also take along stories and anecdotes with you. These are things that will help you establish a human connection with the investors.

The other half of the equation

When you strike a deal with a seasoned investor, they are not only bringing in the money that has been agreed upon, but they are also bringing to the company knowledge, connection, advice, and a certain flair and reputation. However, these four elements are sometimes not incorporated in the valuation. Many a time, entrepreneurs lose deals by being adamant about how much their company is valued at from a monetary perspective while completely ignoring the other half of the equation. It is the investors and the investment that is going to get your business to graduate from an idea on a piece of paper to a money-pumping business.

When Airbnb was trying to raise money, they were turned down so many times that they had to resort to selling collectible cereal boxes. And Ben Silbermann was told no 10 times before he secured seed funding for what would later go on to be called Pinterest.Investors know first hand that when someone is in the early stages of building a company, the fund-raising process is going to be intimidating. People will throw a lot of advice at you, and there will be moments when you will experience a lack of clarity because you can’t figure out where to start and whom to listen to. The learning curve is going to be steep, but with an entrepreneurial mindset, you’ll be able to navigate your way.

Darshana works at NEXT Venture Corp, which has organised several incubators/business accelerators